An introduction to capital allowances
While an essential part of our economy, there are few of us who enjoy paying taxes – The Beatles famously bemoaned high levels of tax back in ’66 with their song Taxman, and almost 60 years later, tax is still a thorny issue for most businesses. Depending on the sector which you operate in, personal tax, corporation tax, capital gains tax, stamp duty and inheritance tax are all business expenses which must be factored intro operating costs before net profits can be drawn. Capital allowances enable a company to obtain tax relief on some types of expenditure, so consequently a business pays less tax.
What is a capital allowance?
A capital expenditure is one which will have a lasting benefit of at least a year and, under the Capital Allowances Act, a company can claim expenditure on purchases against its taxable profit when it invests in a capital asset such as equipment and machinery. The value of some or all of the cost of these items, collectively known as plant and machinery, can then be deducted from profits before paying tax.
In addition to plant and machinery, a business can also claim capital allowances for some other expenditure including renovating a business premises in certain areas, research and development, patent and intellectual property rights. Generally, you must own the asset on which the capital allowance is claimed, rather than hire or lease it, and smaller assets which are deemed ‘plant and machinery’ include computers and printers, tools or specialist machinery.
It’s best to discuss expenditure and potential tax relief with an accountant to ensure that you are able to maximise capital allowances, but if you are considering upgrading your operations borrowing to make the investment can be an effective way to maximise allowances and reduce tax obligations.
How much capital allowance can I claim?
The Annual Investment Allowance provides a 100 per cent deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most companies. Beyond the annual limit, additional qualifying expenditure typically qualifies for an annual writing down allowance of 18 per cent.
However, for expenditure incurred from 1 April 2021 to 31 March 2023, businesses can claim a super-deduction of 130 per cent capital allowance on qualifying plant and machinery. This means that for every pound that a company invests, its tax bill will be cut by up to 25p. There is also a first year allowance of 50 per cent on most new plant and machinery investments that ordinarily qualify for six per cent special rate writing down allowances.
For businesses which experienced a boost in activity during the pandemic, this super-deduction presents an opportunity to invest increased profit into improving production lines or upgrading machinery and simultaneously reducing an otherwise increased tax bill at the end of the current tax year. In effect, the super-deduction enables a business to claim more capital allowance than they spend.
Again, it is best to discuss individual circumstances with an accountant to ensure your investment qualifies and takes advantage of the super-deduction while it is in place, and any other tax relief as currently available.
When should I use capital allowances?
Capital allowances are often under-utilised by companies and it can be quite complex to ensure expenditure qualifies for capital allowance. An experienced accountant will be able to help determine what is eligible for each business according to the trade it operates in or the properties it owns.
For many companies, the end of the tax year creates a natural moment to review and consider investment and expenditure to take advantage of capital allowances. It’s important to make time ahead of the 5 April deadline to discuss purchases for the business with your accountant.
With corporation tax set to rise to 25 per cent on profits above £250,000 from 1 April 2023, now is a prime moment to maximise capital allowances and the super-deduction on expenditure before 31 March and potentially reduce your business’ tax obligation. Consider how machinery or equipment could improve your business’ efficiency and boost productivity.
How can I fund investment in my business?
Capital allowances are not automatically given and must be claimed in a tax return, however ensuring your company retains a good cashflow and reserves might mean that funding new equipment or machinery will stretch the business’ finances.
Commercial finance can provide a way to purchase and upgrade your operations. With a wide range of asset finance available across many business sectors, even specialist equipment can be purchased through a loan, enabling you to make improvements and take advantage of capital allowance and the current super-deduction. Working with a whole-of-market commercial broker will provide the best opportunity to take advantage of available funding and to get things organised easily and promptly.
